ESG and compensation transparency: HR’s role in managing new trends

How compensation professionals can prepare for increased scrutiny

Mar 07, 2023

Key takeaways

HR plays a key role in implementing ESG initiatives, especially concerning employee compensation

Pay transparency requirements are being implemented by several states, and HR should prepare proactively for a new era of transparency

Compensation professionals should review pay practices and procedures to ensure they are nondiscriminatory, fair and objective

Compensation & benefits
Business tax Employee benefits Labor and workforce Private equity

This role is even more important in light of various state law initiatives to increase compensation transparency. After all, pay is an important measure of diversity and inclusion in the workplace. As employees become increasingly aware of what their peers are paid, they may raise questions of fairness when they compare their pay to that of their co-workers.

This highlights the importance of how proactively and objectively employers determine the market price for their jobs in the open market.

ESG and salary transparency

Although the initial focus of ESG was on environmental sustainability for external constituencies, such as shareholders and customers, emphases have expanded through initiatives to address what is arguably the most important internal constituency—a company’s employees.

The goal in this area is to cultivate a healthy and sustainable corporate culture that minimizes turnover and negativity by fostering inclusion, diversity, and mutual support between management and employees. Arguably, the single most important factor within the culture is whether employee compensation is perceived as fair, nondiscriminatory, and determined based on objective data rather than arbitrarily or inconsistently.

At the same time, the so-called salary transparency movement is pushing employers to disclose compensation, benefits, and perks when they post job openings on their websites, job bulletin boards, and similar forums. Through the first two months of 2023, California, Washington state, Rhode Island and New York City had adopted rules along these lines, and New York state is expected to adopt similar rules.

In addition, while the evidence is largely anecdotal, it seems clear that millennials and younger employees do not have the cultural bias against sharing compensation information with peers as was the case with baby boomers and older employees. So, while an employer may not be in a state that requires disclosure in job postings, information about peer compensation may be widely disseminated inside the company, at least at certain levels, and, worse, without discipline or accountability for sharing accurate information.

Where’s our possible exposure?

The risk HR should consider is that you may be called upon on short notice to justify and document how pay grades and salaries were determined and administered.

This could leave the compensation team in HR needing to justify or explain pay rates to senior management, the employees, and possibly the shareholders as constituencies for how the company administers compensation. Of course, the stakes are higher when the company is adopting initiatives to improve ESG performance or branding with those groups.

What steps can compensation professionals take to address their role in the process?

Many of the steps HR departments have taken may go a long way toward addressing this exposure. Documentation of due diligence, regular data refreshing, and reviews of how well current processes are working will also help.

First things first: Have you recently considered how robust and objective the salary data you are using is? There are many sources for pay data, and there is no right or wrong answer to which sources are the best for your purposes. One thing to consider, though, is how easy it would be to point to your data sources as being authoritative and reliable when pay decisions were made.

It is likely that obtaining a detailed report from an independent third party is more defensible on issues of objectivity, inclusion, and fairness. It may be worth pricing what it would cost your company to obtain such support, at least on targeted positions. But, of course, there may be no specific ESG requirement that you do so.

From there, reviewing your current written job pricing strategy and policies will confirm you recognize the importance of fairness, objectivity, and inclusivity in ensuring that compensation administration plays its part in the company’s overall ESG efforts. Once you have reviewed and revised this documentation, you should circulate it to appropriate senior management for their comments and support for your overall policy and approach.

Policy implementation should be documented in written processes and procedures that ensure the policy goals you have adopted are being carried out. Employees in the compensation function, especially those new to the company, should be trained thoroughly in following written procedures, particularly on how to escalate any questions to management.

Finally, bear in mind that compensation transparency and ESG itself are evolving rapidly. Ensure someone specifically owns the process of keeping up with external changes and is empowered to recommend reviews and revisions of your operating documents as often as conditions may merit.

RSM contributors

  • Mark Ritter
    Senior Director

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